Tuesday, March 3, 2009
Forget conventional wisdom
Today ,the gold mining indices ($HUI, $XAU, and GDX/$GDM) were up on a day gold was down and the general stock indices ($NYA, $SPX and $INDU) were also down. This is a clue not to be dismissed. This indicates the gold miner correction is completing and the gold price will stop declining soon (miners bottom before gold price). I believe new all time highs for the gold price are coming and I don't think there's a chance in hell that this spring rally is over for gold or gold mining equities.
I will give you some conventional wisdom that you will read about gold that is either partially or completely false:
1. Gold goes up when the dollar goes down.
2. Gold is an inflation hedge and is a lousy investment during deflation.
3. If gold can't do well when stocks crash, wait until stocks do well and then it will really fall.
I submit to you that all of these things are based on conventional wisdom espoused by JP Morgan, Goldman Sachs, and standard sheeple financial analysts. They are all overly simplistic and/or outright wrong. Here are my rebuttals to these arguments:
1. Gold is a currency that competes with the U.S Dollar, much like it competes with all fiat paper currencies that exist around the globe (e.g. Euro, Yen). Some days it moves the same direction as the U.S. Dollar (as in recent movements) but more often it moves in the opposite direction. The U.S. Dollar index is a deceptive index that compares Uncle Buck to all other worthless paper promises/fiat currencies, so what happens if they are all sinking together but the U.S. Dollar is the strongest of the worthless bunch? In this case, gold will rise relative to all currencies. This is what has started and will continue.
2. We are in the midst of the most deflationary impulse the U.S. economy has seen in decades, yet gold is close to its all-time high. Period. End of story and stop ignoring current facts. The same people that say gold is an inflation hedge want to say that gold is up because of fear and the market being down? Well, which is it? Because if it's the latter, and gold is only up due to fear, then we have a conundrum. If we are up during inflation and up when fear runs high, we have a perpetual well of support for rising gold prices, don't we? History teaches us that the "real" price of gold goes up much more consistently during deflation than inflation, but everyone seems to want to ignore deflation and focus on the 1971-1980 gold run as if that's the only time gold and gold miners have done well in the United States! I'll admit that having a fixed gold price makes it hard to do apples to apples comparisons in our history, but just like this stock market bear is crying out that this is more than just another cyclical recession, gold is also screaming that this is more than just another recession.
3. Just like#2, people who don't like gold want to have their cake and eat it too. So gold is supposed to rise with an inflationary stock market bull (e.g., 2003 to early 2008) and when stocks go down?
More importantly, gold miners' profit margins are increasing on a daily basis and gold miners proved themselves not just during the awful range-bound inflationary burn of the 1970s, but during the last depression in the 1930s.
History also shows that gold stocks do well during secular bear markets in the U.S., so why fight the trend?
Besides, gold has no counterparty risk. That is worth a hell of a lot in this environment. Anyone worth their salt would tell you that cash is king during deflation and gold is the purest and most accepted form of cash equivalent available on the planet for the past 2000 years. Yes, I know you can't spend gold at a 7-11, but that argument ignores the obvious: you can't spend a 90-day T-Bill, Swiss franc or CD (certificate of deposit) at 7-11 in the U.S. either - duh!
I predict gold moves to new highs this spring, along with the pending stock market rally that should begin before the month is over. Haters can hate on me if I'm wrong, but if I'm right, the haters must agree to be ignored when it comes to all things gold forever. PERIOD.